Portfolio return, Stock return, Leverage

Question 11: Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has 1/3 of its value invested in each stock. Each stock has a standard deviation of 25%, and their returns are independent of one another, i.e., the correlation coefficients between each pair of stock is zero. Assuming the market is in equilibrium, which of the following statements is CORRECT?

A Portfolio P's expected return is greater than the expected return on Stock B.

Question 13: Assume that in recent years both expected inflation and the market risk premium (rM - rRF) have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes?

A The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas.

B The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas.

C The average required return on the market, rM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0.

D Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0.

E The required returns on all stocks have fallen by the same amount.

Question 14: Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's operating net cash flow increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

A The company cut its dividend.

B The company made a large investment in a profitable new plant.

C The company sold a division and received cash in return.

D The company issued new common stock.

Question 15: HD Corp. and LD Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, HD uses more debt than LD. Which of the following statements is CORRECT?

A Without more information, we cannot tell if HD or LD would have a higher or lower net income.

B HD would have the lower equity multiplier for use in the Du Pont equation.

Attachments

Solution Preview

Please see attached file.

Question 11: Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has 1/3 of its value invested in each stock. Each stock has a standard deviation of 25%, and their returns are independent of one another, i.e., the correlation coefficients between each pair of stock is zero. Assuming the market is in equilibrium, which of the following statements is CORRECT?

A Portfolio P's expected return is greater than the expected return on Stock B.

Portfolio beta = 1/3 ( 0.8+ 1.0 + 1.2) = 1 = Beta for the market
There is no unique risk for the portfolio as the correlation coefficients between each pair of stock is zero.
Expected return for stocks / portfolios with the same beta is equal.
Beta for Stock B = Beta for Portfolio = Beta for Market =1
Therefore they all have the same expected ...

Solution Summary

5 multiple choice questions on portfolio expected return, expected rate of return on the company's stock, effect of changes in inflation and market risk premium on return on stocks, operating net cash, leverage have been answered.

What is the expected return on a portfolio if an equal amount is invested in each stock? What would be expected return if 50 percent of your funds is invested in stock A and the remaining funds are split evenly between stocks B and C?
Stock A 7%
Stock B 12
Stock C 20
You are considering two stocks and have determined

36. Ahmed purchased a stock for $45 one year ago. The stock is now worth $65. During the year, the stock paid a dividend of $2.50. What is the total return to Ahmed from owning the stock?
a. 5%
b. 44%
c. 35%
d. 50%
37. If you were to compare the returns of an individual stock to a market index, select the answer be

Stock A has an expected return of 10% and a beta of 1.0. Stock B has a beta of 2.0. Portfolio P is a two-stockportfolio, where part of the portfolio is invested in Stock A and the other part is invested in Stock B. Assume that the risk-free rate is 5% and that the market is in equilibrium. Portfolio P has an expected return of

Scenario:
Roger has just been hired as chief portfolio officer of Bear United Capital. As part of this new position, he has been asked to assemble a model portfolio from a set of assets. The assets in the model portfolio include the following:
Please see attached word document for data set.
Using the above assets from th

1. Why are bond market indices more difficult to construct and maintain than stock market indices?
2. An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30% allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the stock index is 1

Financial Calculations: Portfolio Weights and Expected Return
You own a portfolio of 250 shares of firm A worth $60/share and 1500 shares of firm B worth $40/share. You expect a return of 4% for stock A and a return of 9% for stock B. Please provide the calculations for the given problems in an Excel spreadsheet.
(a) What

Please detail calculations so that they can be posted into an excel spreadsheet and please explain how the calculations were devised.
Suppose you have invested $ 50,000 in the following four stocks:
Security Amount Invested Beta
Stock A 10,000 0.7
Stock B 15,000 1.2